As the Labour government committed to not raising Income Tax, National Insurance, or VAT rates in their election manifesto, speculation is building over which other taxes (such as capital gains tax) could see adjustments in the upcoming Autumn Budget on October 30th.
Chancellor Rachel Reeves has pointed to a pressing need to address a £22bn gap / “black hole” in public finances, sparking widespread speculation about possible tax hikes.
One tax under close scrutiny is Capital Gains Tax (CGT), which is imposed on profits made from selling capital assets such as shares, property, antiques etc.
In the 2022/23 tax year, CGT generated £14.4bn in revenue, with only 369,000 individuals paying the tax.
Despite this being a relatively small proportion of the population, the number of people paying CGT has doubled over the past decade, making it an appealing option for revenue-raising.
Capital Gains Tax is charged on the profit (or "gain") from selling certain assets, rather than on the sale price itself. These taxable assets include shares or investments (not held in ISAs or pensions), personal possessions worth more than £6,000 (excluding cars), and land and property that is not the taxpayer’s main residence.
It’s important to note that CGT is calculated based on the difference between the original purchase price and the market value at the time of sale. Even if an asset is given as a gift, it may still be subject to CGT unless specific exemptions apply.
Not all assets are liable for CGT. Cars and primary residences, for example, are typically exempt. Additionally, transfers between married couples or civil partners, and assets passed on after death, are free from CGT liability - although these may be subject to Inheritance Tax.
Everyone benefits from an annual CGT allowance (known as the Annual Exemption) which currently stands at £3,000. This threshold has been dramatically cut in recent years, down from £12,300 just two years ago. Tax is only levied on gains exceeding this allowance.
For those selling shares, this allowance can help reduce tax liability by spreading disposals over several years. However, individuals selling high-value assets like second homes don’t have the same flexibility and may find themselves quickly liable for CGT.
Once gains exceed the £3,000 threshold, the tax rate depends on both the taxpayer’s income bracket and the type of asset sold. Higher and additional rate taxpayers are charged 24% on residential property gains and 20% on other assets. Basic rate taxpayers enjoy lower rates - 18% on residential property and 10% on other assets.
However, basic rate taxpayers will pay the higher CGT rates if the total of their gains plus their income exceeds the basic rate threshold which is currently, which currently starts at £50,270.
Given the complexity of CGT, there have been calls for simplification, which could either reduce or increase the tax burden. Many analysts believe that the new Chancellor will opt for changes that increase revenue, particularly as the government faces pressure to plug the significant deficit.
One option on the table is a unified CGT rate, which could simplify the tax but also increase the overall tax take, especially if set at the current rates for higher taxpayers or on property sales.
The government could also consider removing some existing CGT exemptions. For instance, restricting or abolishing the exemption for transfers between spouses and civil partners could raise substantial revenue, as this is a common tax-planning strategy for families.
Another possibility is further reducing or completely eliminating the CGT allowance, which has already seen significant cuts. This change would be relatively straightforward and could provide the government with additional revenue without the need for substantial overhauls to the existing tax framework.
By targeting CGT, the Labour government could raise additional funds without breaking its manifesto promise not to increase major tax rates. Reducing allowances or broadening the scope of CGT would allow the government to increase tax revenue while keeping headline tax rates the same.
With political commentators speculating about these potential changes, all eyes will be on Chancellor Rachel Reeves as she delivers the Autumn Budget and reveals her plans for CGT and other tax reforms.
Next Steps
The team at ETC Tax has vast experience in dealing with all UK taxes including VAT. If the Autumn budget has got you wondering about your tax affairs including CGT please get in touch.
